NEW DELHI: Struggling carrier Kingfisher Airlines was perilously close to having its operating permit suspended by the country's former aviation regulator, an extensive review of government documents by ET shows.

On July 9, a day before he was abruptly removed from his post, EK Bharat Bhushan, the head of the Directorate-General of Civil Aviation (DGCA), noted in a file on the financial surveillance of Kingfisher that "the airline maybe issued a notice that unless it is able to clear its liabilities, or a substantial portion thereof, including employee wages, which have remained unpaid since February 2012, within 15 days, we will be constrained to suspend the operating permit of the airline".

The note was the culmination of a series of investigations into the operations of Kingfisher, which has been hobbled by rising debt and liabilities and strikes by pilots over unpaid salaries.

The file noting has since "gone missing", according to Bhushan, who has sought an independent enquiry. Bhushan's successor Prashant Sukul, who was in charge only for a fortnight before Arun Mishra took over as the DGCA head this Thursday, told reporters last week that "no such document was found".

The financial surveillance file was created after a team of DGCA officials launched an audit of Kingfisher at its Mumbai office from November 22-24, 2011. Earlier that month, Bhushan ordered for the first time a similar exercise for all airlines to ensure that financial duress does not compromise safety.

An airline's permit is subject to "mitigation of potential risk factors" identified during a financial surveillance, according to DGCA rules.

All airlines, except Kingfisher Airlines and Air India, were found to have fulfilled what DGCA guidelines say are examples of possible unfavourable trends in an operator's financial condition such as significant layoffs, delays in meeting payroll, inadequate maintenance of aircraft, shortage of supplies and spare parts and curtailment of flights, or had a system of remedial measures in place.

National carrier Air India enjoyed the government's financial support.

Bhushan Ordered Daily Oversight

In the case of Kingfisher, the DGCA team found that the airline flouted most of the "unfavourable" parameters, including "a significant increase in the total number of reported safety incidents in the past seven years".

In its analysis and suggestions, the audit team said "financial stress has not impacted safety/airworthiness of Kingfisher until now". But it added that "given the risk factors involved, enhanced surveillance by the regulator must be placed to monitor compliance of safety standards".

But a civil aviation ministry official said it was up to DGCA to suspend an airline if it flouted rules and the ministry would not intervene. Soon after the financial audit, Bhushan ordered a daily oversight of the airline.

Most reports revealed serious lapses in operations. In between, he summoned senior officials of the airline, including CEO Sanjay Aggarwal, to keep checks. He also summoned Mallya in March, asking why a showcause notice should not be sent to the airline.

Mallya failed to come up with a satisfactory explanation and unlike previous meetings, a recovery plan was "conspicuous in its absence", records of the meeting show.

Bhushan sought a fresh assessment of the airline in the first week of July because Kingfisher had shown little signs of improvement and the airline faced another round of strike by employees.

Officials in DGCA said a subsequent report, which was submitted shortly after, confirmed as much, pointing out that on many counts, Kingfisher was "not getting anywhere", owing to a ban on sale of tickets from the International Air Transport Association platform, no investors in sight, and unpaid salaries.

Bhushan made his file noting after this report. He was removed the next day.